Exotic Isle – Graphite in Sri Lanka

To most mining mavens, Sri Lanka was a land of mystery, onerous state intervention and certainly not one of mining. Sri Lankan graphite deposits are some of the richest on the planet. Under British colonial rule in the early 1900s, the nation was a significant graphite producer and exporter. Independence came in the 1950s and then there was a distinct socialistic trend in governments in the following decades culminating in the nationalization of the graphite sector in 1971. The private sector was allowed back into Sri Lanka’s graphite industry in the early 1990s, but by that time, problems with the civil war were preventing development on a large scale. Additionally many of the State owned mines had been over-exploited, allowed to deteriorate and had not been subject to meaningful exploration to find new reserves. The opening of the mining sector in recent years presents an opportunity for foreign companies to pursue Sri Lankan graphite on a significant scale.

Sri Lanka is known to be underlain up to 90% by Proterozoic high grade metamorphic rocks with Proterozoic sediments, particularly along the coastal regions. According to the US Geological Survey Sri Lanka currently produces a very small amount of graphite, about 4,000 metric tons per annum. Sri Lanka’s graphite is a unique product. The country produces lump and chippy dust graphite and is the world’s only source of these particular materials. Lump and chippy dust graphite are the highest-value graphite products found globally. These unique and comparatively higher margin vein (lump) deposits currently make-up less than 1% of the world graphite production. In 2012, prices for Sri Lankan lump and chip graphite averaged $1,990 per metric tonne, significantly higher than prices reported for other products, such as flake or amorphous graphite.

This is not the first time that the Sri Lankan mining sector has opened up for the it had a period of strength during the late 1990s, during which time companies like mineral sands producer Iluka Resources (ASX:ILU) actively explored the country. However as is well-known the country was long wracked by civil war with a Tamil insurgency that was finally quashed in recent years.

The disruption resulted in Iluka departing Sri Lanka in 2003, citing “accessibility” as a concern. The final defeat of the separatist forces in 2009 paved the way for the country to invite foreign investors to come back with even Iluka said to be considering a return to Sri Lanka’s deposits.

The Wall Street Journal reported that the government intended to offer significant tax incentives and a liberal regulatory framework to woo incoming investors in the mining sector. These would include a royalty rate of 5%, according to the country’s minister of environment and renewable energy, Susil Premajayantha. The minister added that the government “won’t levy any other charges”, presumably referring to extra taxes on mineral products.

Production in recent years has been sourced from two graphite mines:

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Kahatagaha Graphite Lanka Ltd., owned by the Government of Sri Lanka:

Producing 80 tonnes monthly, and is planning to increase production to 125 tonnes monthly in 2013

Kahatagaha Kolongaha is one of the high-value mines accounting for Sri Lanka’s current output of lump and chip graphite. The mine has been in production since 1872 and reportedly produces a product with total graphitic carbon content greater than 90%.

Was producing 6,000 tonnes of value-added graphite annually prior to the global recession and restarted operation at its Ragedara vein mine in July 2012

That company entered the Sri Lankan sector in 2000, buying control of the Bogala graphite mine, a historic operation dating back to 1847.

The most advanced of the new entrants if Elcora Resources. This company has a lot to thank Zenyatta Resources for… all graphite was largely the same until Zenyatta came along marketing the idea that it had a better grade of graphite and that the only other places this could be had (historically) was in the North of England (at a mine famous for its pencil “lead”) and in Sri Lanka. Then oops along came Elcora and gazumped well-nigh everyone by buying itself a share in Sakura Graphite (Pvt) Ltd that controls 99 acres in Sri Lanka, which includes the past producing Ragedara graphite mine.

In the second half of February Elcora announced that it had signed a binding letter of intent to acquire 40% of the outstanding shares of Sakura Graphite (Pvt) Ltd. The Ragedara property has an unrestricted exploration license covering four square kilometres and a mining license for unlimited monthly production. Historically, the Ragedara mine operated (under state-ownership) between 1974 and 1985 and produced as much as 18,000 tons per year of high purity graphite. The Ragedara graphite is of natural crystalline vein type.

Sakura has developed the mining project over the last three years and is now nearing readiness to begin production with much of the mining equipment having been upgraded over the last two years. Upgrading of the remaining equipment will continue as Elcora progresses the project towards becoming a fully-integrated graphite producer. Through this transaction Elcora will be the operator of the mine with the intention of beginning production in the next couple of months.

Under the terms of the LOI to acquire the common shares of Sakura, Elcora will issue 5,066,667 of its common shares and 7,856,000 warrants to purchase common shares to the vendors.

Elcora also intends to complete its previously announced non-brokered private placement offering with a full warrant attached entitling the holder to acquire one common share of Elcora for $0.30 for 18 months for a minimum offering of $500,000 and a maximum offering of $750,000.

A less advanced player is Bora Bora Resources (ASX:BBR) which went into Sri Lankan graphite in April 2013 when it did a deal to acquire a 75% interest in the Matale graphite project. The Matale project covers 24 km2 of tenements lying in the center of Sri Lanka. The lands surround the aforementioned Kahatagaha Kolongaha graphite mine. Bora Bora notes on its website that it pursued the project because of its “high-grade nature not comparable to any other region of the world.”

As part of the deal, BBR acquired 100% of the issued capital of Plumbago Mining Pty Ltd which holds 75% of Plumbago Lanka (Pvt) Limited – the balance is held by a local partner as required under Sri Lankan law. Plumbago-Lanka has also secured exploration licenses over two other areas in the same geographical areas and has additional license applications pending.

The map shows the relationship of the claims of Elcora, Bora Bora and the state-owned Kahatagaha Kolongaha graphite mine.

Mention might also be made of St Jean Carbon (SJL.v) which has its main focus on graphite in Quebec but does have Sri Lankan exposure as well. In this case is activity is contained in Han Tal Graphite (Pvt) Ltd which holds a land package constituting 113 mining grids with 56 historical mines and exclusive exploration licenses to explore and develop the 113km2 of high grade graphite mining claims in south-west Sri Lanka. These claims have previously had historical artisanal production dating back to the 1920’s and 1930’s.

St Jean believes the veins associated with these operations remain open 10-15m below the surface of the pits offering potential for near term production. The Han claims have been described by the Sri Lankan Geological Survey and Mining Bureau (GSMB) as comprising some of the best graphite areas in the country. Only further work will clarify the matter.